CANADA FX DEBT-C$ hits 9-day low vs US$ on growth fears

TORONTO, July 16 (Reuters) - Canada’s dollar sank to a nine-day low against its U.S. counterpart on Friday as growing concerns about the strength of the U.S. economic recovery and the pace of growth in China dampened demand for commodity-based currencies.

Canada is a major exporter of commodities such as oil, natural gas, copper, and gold, and about three-quarters of the country’s exports are absorbed by the United States.

A raft of recent U.S. economic data has come in weaker than market forecasters had predicted, stoking concerns that the health of the world’s No. 1 economy is taking a turn for the worse.

Data this week out of China also prompted concerns among market players that growth there is less robust than expected.

“We remain Canadian dollar bears because we think that the increased uncertainty about the U.S. and the Chinese recoveries will continue to weigh on sentiment and therefore your commodity-based currencies,” said Matthew Strauss, a senior currency strategist at RBC Capital Markets.

“The Canadian dollar is particularly vulnerable given that the focus currently is on the weakness coming out of the U.S.”

At 10:55 a.m. (1455 GMT), the Canadian dollar CAD=D4 was at C$1.0532 to the U.S. dollar, or 94.95 U.S. cents, down from Thursday’s close at C$1.0388 to the U.S. dollar, or 96.26 U.S. cents.

The currency fell as low as C$1.0558, or 94.71 U.S. cents, a 1.6 pct from the Thursday’s close, marking its biggest intraday drop this month.

The softness came despite a weaker greenback, which slumped to a two-month low against the euro and a broader basket of currencies. It hit a seven-month low against the yen.

The U.S. dollar extended losses after the Thomson Reuters/University of Michigan preliminary July consumer sentiment survey came in much weaker than forecast. [ID:nN16126985]

Most commodities are priced in U.S. dollars and a weaker greenback makes it cheaper for holders of other currencies to buy them. But the price of oil slid below the $77 a barrel mark after the U.S. consumer sentiment data was released. [O/R]

Gold fell below $1,190 an ounce as demand was seen as flagging, and copper prices fell sharply. [ID:nLDE66F0VL][ID:nLDE66F0S2]

“It’s interesting that the Canadian dollar is struggling even against its commodity peers,” Strauss said. “All of them are in trouble given the global risk aversion, but because most of the current risk aversion emanates from weak data releases out of the U.S., it seems to be more vulnerable.”

The next big Canadian-focused market event will be the Bank of Canada’s interest rate decision on Tuesday. Market expectations are leaning toward an increase in the bank’s key rate. BOCWATCH

Generally, that would stoke demand for the currency due to possibility of higher returns, but that may not be the case this time, said Camilla Sutton, a currency strategist at Scotia Capital.

“Increasingly it’s expected that even though they’ll hike interest rates, the statement itself may be more dovish than the previous one, which could keep this downward pressure on Canada even into the interest rate hike.”

Canadian primary dealers and global forecasters surveyed by Reuters expect the bank will raise its key overnight interest rate next week by 25 basis points to 0.75 percent, though the pace of subsequent hikes is less clear. [CA/POLL]

BONDS RALLY

Canadian bond prices rallied along with U.S. Treasuries as worried investors sought the safety of government debt.

The other important piece of U.S. data out on Friday was the consumer price index, which showed that inflation was down for the third month in a row in June. It was largely in line with forecasts.

“Even though the core inflation came in a snick above expectations, the market seems to be seizing on any sign of weakness in any of the reports,” said Doug Porter, deputy chief economist at BMO Capital Markets. “Headline inflation appears to be in full retreat.”

Stocks in the U.S. and Canada were down 1.5 percent and 1 percent respectively on disappointing revenues in U.S. corporate earnings releases and on the darkening mood on the economy. [ID:nN16102610]

Canada’s two-year bond CA2YT=RR was up 11 Canadian cents to yield 1.606 percent, while the 10-year bond CA10YT=RR added 44 Canadian cents to yield 3.185 percent. (Reporting by John McCrank; editing by Peter Galloway)